Page 151 - DCOM409_CONTEMPORARY_ACCOUNTING

Contemporary Accounting

Notes 4. Maximizing the profits: To achieve this ultimate goal of any business reporting at the
right time, at right place to the right person in right manner becomes an essential feature.
5. For better control: Abnormal events can be checked in time by obtaining the necessary
information in respect of each operating activity. Control through reports become effective
as compared to personal investigations.

12.2.2 Weakness of Accounting Framework

Financial reports are incapable of providing all relevant information. There are a number of
reasons including those related to the nature of the financial accounting processes, and those
related to cost and benefit considerations. Financial reporting is not an adequate source of
information needed by users of the reports. They also need to consider pertinent information
from other sources. The users of accounting informations should aware about the weaknesses of
accounting framework.
The following are some weakness of accounting framework:
1. Financial accounting is concerned mainly with measuring the financial effect of transactions
and other events on the entity’s financial position, results of operations and cash flows.
Accordingly, financial accounting is not usually able to produce information to assist in
the evaluation of the entity’s ability to achieve objectives that are not capable of financial
measurement in an objective manner.

2. Financial accounting does not differentiate, through its processes, between the entity’s
performance and that of its management. Although, management’s ability is one of the
important factors that affect the entity’s performance, there are other factors beyond
management control which affect the entity’s performance such as natural disasters and
external political and economic changes. Accordingly, it is not possible for financial
accounting to provide information which can assist in evaluating management’s
performance aside from the entity’s performance.

3. The information currently provided by financial accounting is predominantly historical
in nature which may or may not be indicative of the future. Yet, decisions made by those
who need this information are usually concerned with the future impact of alternative
courses of action.

4. To a significant extent, financial reporting information is based on estimates, judgments
and models of the financial effects in an entity of transactions and other events and
circumstances that have happened or that exists rather than on exact depictions of those
effects. The framework establishes the concepts that underlie those estimates, judgments
and models and other aspects of financial reporting.
Self Assessment

Fill in the blanks:
7. Accounting reports helps to get full information about the entire ……………. activity of
the firm.
8. Accounting reports consist of …………..statistics.
9. Financial accounting is concerned mainly with measuring the …………effect of transactions.
10. Financial accounting is not usually able to produce information to assist in the evaluation
of the entity’s ability to achieve objectives that are not capable of ………………..in an
objective manner.

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